Inequality and Opportunity

The Relationship Between Income Inequality and Intergenerational Transmission of Income

by Francisco Perez-Arce, Ernesto F. L. Amaral, Haijing Crystal Huang, Carter C. Price

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Research Questions

  1. What are the likely impacts of growing income inequality on inequality of opportunity?
  2. How are inequality of opportunity and inequality of outcomes linked?
  3. How does parents' income relate to their children's income?

Rising income inequality has the potential to affect outcomes for children whose parents are at the lower end of the income scale by curtailing their opportunities. This report aims to understand the extent to which inequalities in opportunity and outcomes are related — and the mechanisms that drive that relationship — to help evaluate which policies have the most potential to level the playing field.

This report reviews recent trends in inequality in outcomes (particularly, income inequality) and proxies for inequality of opportunity (measures of intergenerational transmission of income) and presents evidence on the extent to which they are correlated across countries and within countries across time. We discuss the evidence that shows that inequality in income and wealth has been increasing in the United States and most developed countries since the 1980s and that income inequality and inequality of opportunity are correlated across countries, but proxy measures for inequality of opportunity do not show the same consistently upward trend that was experienced by income inequality.

The report then presents a framework to understand the mechanisms underlying the relationship between inequalities in income and opportunity. In light of this framework, we discuss the potential effects of policies on both income and inequality opportunity, and how these can be quantitatively assessed.

Key Findings

Income Inequality Has Risen Since the 1980s, Driven by Increased Inequality in Labor Market Earnings

  • Much of this increase has been driven by increased concentrations in the top 1 percent of the income distribution.

Inequality and inequality of opportunity are correlated across countries.

  • However, measures for inequality of opportunity do not show the same consistently upward trend that was experienced by income inequality.
  • Antipoverty policies implemented in the United States over the last five decades may have helped stave off poverty and inequality of opportunity despite labor market trends.

Not All Policies That Affect Inequality Will Have the Same Impact on Inequality of Opportunity

  • There are no direct measurements that allow us to gauge the current impact of policies on inequality of opportunity.

Recommendation

  • For policymaking purposes, it is important for researchers to build full simulation models using our framework to provide accurate predictions of the impact of different policies on inequality of outcomes and opportunity.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Framework for Understanding Inequality in Income and Opportunity

  • Chapter Three

    Trends in Inequality

  • Chapter Four

    The Relationship Between Income Inequality and Intergenerational Transmission of Income

  • Chapter Five

    Potential Impact of Policies on Inequality and Inequality of Opportunity

  • Chapter Six

    Conclusion and Road Map for Further Work

  • Appendix A

    Factors for the Increase in Wage Inequality

  • Appendix B

    Reference Sources for the Great Gatsby Curves

  • Appendix C

    Results of Income Support Simulation

  • Appendix D

    Within-Country Changes in Inequality of Income and Opportunity: Analysis for Additional Countries

Research conducted by

This RAND-Initiated Research was produced using discretionary funds provided by philanthropic contributions from RAND supporters and income from operations. This research was undertaken within RAND Labor and Population.

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